## Facts

- Southwest Gas Utilities Corp. defaulted on interest on its first lien bonds and was insolvent, with secured bonds, unsecured claims, and preferred and common stock outstanding.
- Creditors implemented a plan under which the bond indenture was foreclosed, the assets were sold in foreclosure/receivership sales for about $752,000 (funded by a bank loan), and the assets were transferred to a newly formed corporation, Southwest Consolidated Corporation.
- The new corporation issued voting common stock and stock purchase warrants in the plan:
  - Former bondholders received most of the new common stock.
  - Participating unsecured creditors received a small portion of common stock and some warrants.
  - Old preferred and common shareholders received the remaining warrants.
- Nonparticipating security holders were paid cash funded by the bank loan; the new corporation assumed and later paid that loan.
- The predecessor’s basis in the assets was about $9,000,000; the new corporation used that higher figure for tax basis, affecting deductions and reported losses.
- The Commissioner treated the transaction as not a reorganization and used the foreclosure purchase price basis, determining deficiencies; the Board of Tax Appeals and the Fifth Circuit ruled for the taxpayer.

## Issues

1. Whether the foreclosure/creditor plan and asset transfer to the new corporation qualified as a tax-free “reorganization” under § 112(g)(1) of the Revenue Act of 1934, permitting carryover basis.
2. Whether the transaction fit within § 112(g)(1)(B) (acquisition solely for voting stock), (C) (transfer with requisite control), (D) (recapitalization), or (E) (mere change in identity, form, or place of organization).

## Decision

- The Supreme Court reversed the Fifth Circuit and held the transaction was not a “reorganization” under § 112(g)(1).
- Clause (B) was not satisfied because the acquisition was not “solely for voting stock”: the plan included warrants and cash payments funded by a bank loan assumed and paid by the new corporation.
- The statutory rule disregarding assumed liabilities for the “solely” test did not apply to indebtedness arising from the reorganization itself (the bank loan), as opposed to liabilities of the transferor that preexisted the transaction.
- Stock purchase warrants were not “voting stock” for purposes of clause (B).
- Clause (C) was not satisfied because “control” immediately after the transfer rested in creditors receiving the new shares, not in the transferor or its stockholders.
- Clause (D) did not apply because “recapitalization” requires an internal reshuffling within an existing corporation, not displacement through foreclosure and creation of a new corporate owner group.
- Clause (E) did not apply because the transaction shifted the proprietary ownership of the enterprise, making it more than a mere formal change.
- The Commissioner’s use of the foreclosure purchase price as the new corporation’s basis was sustained.

## Legal Principles

- For § 112(g)(1)(B), “solely for voting stock” is a strict requirement; voting stock plus other consideration fails the definition.
- The statutory disregard of assumed liabilities in testing “solely for voting stock” does not extend to a liability created to effectuate the transaction rather than a preexisting liability of the transferor.
- Stock purchase warrants (options to acquire stock) are not “voting stock” because they confer no present voting rights.
- Under § 112(g)(1)(C), a transfer is not a reorganization when control immediately after the transfer is held by former creditors through shares issued to them, rather than by the transferor or its stockholders.
- “Recapitalization” under § 112(g)(1)(D) refers to a reshuffling of capital structure within the framework of a continuing corporate entity.
- A “mere change in identity, form, or place of organization” under § 112(g)(1)(E) does not include transactions that materially shift proprietary ownership.

## Conclusion

The Court ruled that a foreclosure-driven restructuring that issued equity primarily to creditors, included warrants and cash payments financed by a new loan, and shifted ownership to a new control group did not qualify as a tax-free reorganization under § 112(g)(1); therefore, the successor corporation could not use the predecessor’s asset basis.


Helvering v. Sw. Consol. Corp., 315 U.S. 194 (1942)